I'd say Harrogate, since it would make a great steampunk town (It has a thing for it's Victorian heritage, which consisted of convincing rich southerners that drinking sulphur water wasn't a retarded idea. They succeeded).
But it already features in the Diablo II expansion pack. (one letter away, wild northlands, hordes of demons. just like the game!)
C'thulu fhthagn-*cough cough* I mean yeah, that would be awesome. Although I think Eternal Darkness did something similar, but it really didn't have a very grand scale for interaction with the city itself.
Yakutsk, Russia, coldest city on Earth, throw in some zombies or another diabolical force and you get one hell of a open-world survival horror game. I'd also like to see some sort of deserted, Silent Hill style game set in Chernobyl... I know that now they're trying to rebuild the population but games are fictitious so we could use the cold, deserted, and irradiated Chernobyl from a while back
Anywhere in Britain would be fine, but especially Cardiff. Or a picturesque Welsh village in the Valleys that is secretly full of cannibalistic serial killers. /cliche
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